Weak capital market hampers economic growth – Pelaelo

• BoB governor says development of capital markets in Botswana needs to be raised significantly • Botswana falls short of international norms • Weak market poses risk to long-term infrastructure financing • But budget speech was silent on enhancing capital markets

Weak capital market hampers economic growth – Pelaelo

The levels of development of money and capital markets in Botswana need to be raised significantly to improve on transmission and potency of macroeconomic policies and to have a greater impact on economic activity, the Governor of the Bank of Botswana (BoB), Moses Pelaelo, has said.
Pelaelo was speaking this week during the launch of the Monetary Policy Statement for 2020. He revealed that as of 2017, the composite financial index for Botswana (encompassing access, efficiency and depth) was two thirds that of Namibia, a third of South Africa’s and a quarter of Singapore’s. In his weighty view, he referred to this as one of the areas to attend to in Botswana’s transformation agenda because Botswana falls short of international norms by nearly every metric and compares unfavourably with peer upper-middle income countries.

Of particular concern to the Bank of Botswana is the paucity of supply of high corporate debt instruments, fragmented credit markets and low levels of development of the government bond market. According to a research paper of the Botswana Bond Market Association, the bond market has a lower market capitalisation in comparison to the equity market in terms of size. This is primarily attributed to the equity market having a longer history that dates back to 1989 and its significant and faster growth over the years. According to the research paper, the development of the bond market in Botswana commenced in 1997 with the issuance of a P50 million bond by Botswana Development Corporation (BDC). By 1999, three more bonds were floated on the Botswana Stock Exchange (BSE) by Botswana Telecommunications Corporation (BTC), Investec South Africa and Botswana Building Society (BBS).

According to the Botswana Stock Exchange, the bond market was modest in 2019 with turnover of P2,141.1 million compared to P2,222.7 million in 2018. The report shows that the Botswana Bond Index (BBI) appreciated by 4.5 percent. The Government Index and Corporate Index registered returns of 3.6 percent and 7.2 percent respectively.
Launching the monetary policy this week, Pelaelo said a weak market presents undue constraints and risks to long-term infrastructure financing, fiscal sustainability and more broadly a headwind to capital market development. In other countries, he said, vibrant and highly liquid government securities markets provide a source of funding for government spending, including local authorities and other public sector entities. “This option is currently limited in Botswana and therefore its development offers a viable avenue for cost-effective domestic resource mobilisation for long-term investment and funding of government projects,” Pelaelo asserted.

At the African Stock Exchanges Conference that was held in Kasane in November last year, it was noted that the African is still grappling with developmental challenges and suffered from infrastructural deficits. The argument was that capital markets in particular could be a solution to drive Africa’sgrowth, given their capital resources. Speaking at the conference, Deputy Secretary, Financial Policy at Ministry of Finance and Economic Development, Elaina Gonsalves, argued that stock exchanges play a vital role in mobilising long-term savings for deployment in various sectors of the economy. She says the Government of Botswana believes that the securities market is the backbone of any country’s financial system. However, in his budget speech recently, finance minister Thapelo Matsheka said nothing about enhancing money and capital markets at such a critical time.

Launching the monetary policy for this year this week, Governor Pelaelo said going forward, policy consultation between the finance ministry and the central bank will focus on designing a transparent and more frequent issuance of a sufficient quantum of domestic government securities in a predictable arrangement that should attract a larger pool of participants and support deficit financing with lower risks. This, Pelaelo said, will be premised on adoption of a strong governance architecture around public debt management underpinned by the country’s well-established track record of prudent fiscal policy and strong institutions.

Given the vulnerability of Botswana to trade shocks, climate change and consequences of prolonged droughts, Pelaelo said there is need to maintain sufficient fiscal and external buffers. “This means building sufficient resilience to afford the fiscal space to undertake counter-cyclical stabilisation when necessary,” he noted. “The contribution of the bank in this regard is through continued judicious management of (the) foreign exchange reserves to preserve capital, generate returns for organic growth and to ensure availability of foreign exchanges necessary for uninterrupted economic activity.”